Petroleum Prices
| Author | James M. Day |
| Position | Professor |
| Pages | 12 |
James M. Day has practiced energy law for over forty years, and has taught Oil & Gas Law and The Regulation of Energy at American University Washington College of Law (WCL) for the past twenty years. Mr. Day was general partner of Day Oil and Gas Exploration and Consulting, working with private companies, U.S. state governments, and small Pacific nations on energy and environmental matters. Mr. Day also served as an energy consultant to the government of American Samoa for twenty years. Mr. Day graduated from WCL in 1960.
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WHEN OIL AND GAS PRICES SOAR and hurt pocketbooks, the question inevitably arises: Why? Economists, consumer groups, and media pundits all offer theories. The following is my basic view on the complex factors affecting oil and gas prices. The petroleum industry consists of exploration and production, refining (manufacturing), transportation, and marketing. Independent companies may be involved in only one or two parts of the petroleum industry. Large petroleum companies, such as Exxon-Mobil, are considered "integrated" if they are involved in all four segments. That, however, does not mean they are self-sufficient. They must obtain crude oil from independent producers, other major multinational oil companies, and foreign state-owned entities. Today, the United States imports 58 percent of its crude oil and petroleum products. Imports are expected to exceed 60 percent in 2005, and we currently lack sufficient refining capacity to meet our growing demand for gasoline, heating oil, heavy oils (to generate electricity), plastics, and synthetics, such as nylon and rayon. Only 2 percent of the world's oil reserves are found in the United States, despite the fact that America consumes 26 percent of the world's production. With the high costs of exploration and production, the risks are huge. In 2003, a consortium of eleven multinational giants agreed to a $10 billion exploration joint venture in Azerbaijan and a $3.6 billion pipeline through Georgia to the port at Ceyhan, Turkey.
SINCE EDWIN L. DRAKE DRILLED THE FIRST OIL WELL in 1859, Adam Smith's law of supply and demand has dominated oil prices. Drake sold his first crude oil for $30.00 per barrel (equal to $650.00 per barrel in 2003). By the end of 1860, seventy-five wells were producing, and the price fell to $4.00 a barrel. With more wells on stream by the summer of 1861, the price fell to ten cents a barrel. During the Civil War, there was rampant inflation and a shortage of whale oil and no camphene from the South's pine forests for kerosene lamps. This caused the price to climb above $10.00 a...
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